Fixed Cost Overhead Variance - Double Entry

Karldugan

Hello all,

The book says when the variance is adverse, this will be a debit to the income statement, which I get, but it doesn't say what to do when you have a favourable variance.

My understanding is; nothing would happen to the income statement, as this will only have the actual cost in anyway so won't need the variance, but surely you can't leave your trial balance with an unassigned amount?

Thanks in advance for the help!

Karl

SandyHood

Under a standard costing system the standard cost would be debited to cost of sales.
If you have an adverse variance this is also debited to cost of sales.
If you have a favourable variance this is credited to cost of sales.
In this way the income statement (PorL) has the standard cost of production and the variances.
The value of variances is in the way they allow management to see the breakdown of the difference between standard cost of actual production and the actual cost incurred.

Sandy
sandy@sandyhood.com